Network Rail charges to be reviewed
Following concerns that there is a mismatch between what Network Rail raises in charges and how it apportions costs between different parts of the network, the ORR has issued a consultation document for PR 18 (the 2018 periodic review). Responses have to be in by 4th March. The findings will help ORR to formulate Network Rail plans in the next control period (CP6, 2019-24), and indeed beyond.
The Rail Delivery Group (RDG) issued its own review of track access charges late last year (LTT 11 December): “There is a perception that the current (charging) regime is not stable, with charges subject to significant changes that are considered to be based on changes to underlying cost drivers”. RDG also holds that the view that current system is complex, needs to better aligned and lacks transparency.
UTG (formerly PTEG) also published its own findings (LTT 25 July 2014), calling for a fairer allocation of costs. UTG says regional railway charges are unfairly high compared to those paid by long distance and commuter operators.
Currently, the Network Grant is paid directly to Network Rail. It is by far its largest single source of income (accounting for around of two-thirds of all NR revenue). However, this is likely to change. The Chancellor hinted in his summer 2015 Budget that the grant will be paid directly to the FTOCs (franchised train operators) in the next control period (which, in theory, should incentivise NR and the FTOCs).
This is now being taken forward: DfT correspondence to the ORR (dated 3 December) states, “Our preference is to remove or significantly reduce the Network Grant in England and Wales for CP6 (the position in Scotland is a matter for the Scottish Ministers.” But it adds that this would require an increase in the total level of income that NR receives from TACs (track access charges) in order for it to meet its revenue requirement.
Direct DfT payments to train operators would revert to the old pre –Network Rail position with Railtrack.
ORR cautions that changes would incur costs and that there would be ‘winners’ and ‘losers’; whereas the costs would be immediately felt the benefits would take a long time to materialise.
Track access charging is a complex business and it requires some explanation.
Three types of charges are available to NR: fixed charges which do not vary with traffic; variable charges which fluctuate with traffic levels and are levied to recover wear and tear to infrastructure. There are five charges falling in the first category, and four in the latter. In addition, there are two incentive mechanisms available to encourage NR to put more traffic on the system (which goes way beyond the simple duty to cut costs).
Throughout the CP5 period the Network Grant will comprise around 62% of total NR income (as previously mentioned); variable charges, other charges and the fixed track access charge make up 16%, 15% and 7% of the rest respectively.
The largest single charge is The Fixed Traffic Access Charge (FTAC); it came to £440m in 2014/15, the first CP5 year. It is only paid by the FTOCs, not the open access (OAOs) or freight operators (FOCs), and has provoked much resentment in the past. It’s one of the big issues facing the industry and was partly resolved a few years ago.
“The case whereby open access operators pay only short-term variable charges but franchised operators pay these along with a proportion of fixed costs was tested in the courts and found to be legal (GNER v. Hull Trains & Grand Central Railway, 2006). The High Court recognised that the open access and franchised services are different, face different risks and may need to face different charges so that the overall effect is not discriminator.”
The RDG notes: “The Network Grant and the fixed track access charge are both arbitrary balancing figures . . . and are not considered to be sufficiently cost reflective.”
The ORR adds: “The FTAC is not allocated in a way that strongly reflects what we know about the cost, and is instead is allocated to operators by simple metrics such as train miles. This approach assumes that much of NR’s cost base is fixed and does not vary much across the network. It does not capture the way that costs can vary, or how different services or use of capacity can impact costs.”
Elsewhere ORR notes that, “ The FTAC is affected by other charges because it is set so as to recover Network Rail’s net revenue requirement once all other projected income (from variable charges, station charges and the Network Grant) have been taken into account.”
Also, “The lump-sum FTAG and Network Grant provides limited transparency to the rail industry as a whole (including governments, NR and the train operators) of which costs are being attributed to which activities or what government money is being spent on.”
The Variable Usage Charge (VUC) is paid by FTOCs, OAOs, and FOCs and recovers maintenance and renewal costs that vary with traffic. This includes the short-run variable cost to recover wear and tear to infrastructure incurred by running additional services.
It’s NR’s 4th largest charge and netted £227m in 2014/15. But this has also come in for industry criticism. ORR maintains:” The current VUC is calculated on a network average rate for each vehicle type and is not geographically disaggregated. This means the VUC rate is the same for a given vehicle wherever it is running. NR referred to its analysis into the presence and cost variation across the network and cited route type and curvature as the two main drivers of this cost variation.”
It continues: “There is anecdotal evidence suggesting that on heavily-utilised parts of the network, the VUC under-recovers short run wear and tear costs. This potential under-recovery occurs because of the nature of the calculation of the VUC and also because as the network becomes busier, NR might face additional operating costs to deliver a certain level of performance. These charges are not in the charging network . . . and this additional traffic may be higher than the costs it imposes”
VUCs vary considerably to the type of stock being used: The default passenger vehicle VUC was 66.16 pence per vehicle mile (PPVM) for a locomotive in 2014/15 as against 29.45ppvm for a motorised multiple unit, 13.34ppvm for a mu trailer car, and 12.18ppvm for an ordinary coach. The cheapest vehicle to run was the Class 139 Parry People Mover (at 2.11ppvm)
Value based charging (to discriminate between operators) will not be introduced in CP6, but could be used in a later control period. The Capacity Charge (CC) is the second largest source of NR income (after the FTAC) and realised £412m in 2014/15, levied on franchised, open access and freight operators alike. It’s part of the money-go-round system to compensate NR for (unplanned) Schedule 8 payments for train delays.
ORR says: “The current structure of charges . . . means that that capacity is priced the same on congested as uncongested parts of the network. . . Value-based would in theory incentivise TOCs to withdraw, re-route or re-time low value train services as a result of having to pay higher charges to access capacity constrained parts of the network.”
Any changes to the charging system would have to be fully compliant with European Railway Directive 2012/34/EU. This Directive will replace existing British regulations, and should be in place before PR18 commences.